Can an advance notice bylaw require that valid notice be provided by a registered shareholder only? How strictly must a notice comply with the form of notice prescribed in the advance notice bylaw? Can a shareholder rely on equities to override the terms of such a bylaw? These specific questions have not been considered in Canada yet, but were recently decided by the Delaware Chancery Court. The Court found that the issuer had validly rejected a nomination notice from a beneficial shareholder dissident.
Advance Notice Bylaws Overview
Advance notice bylaws (ANBs) are commonly enacted by public companies to ensure orderly shareholder meetings and election contests. Many Canadian public companies have them. When in place, they effectively prevent shareholders from ambushing a shareholders’ meeting by proposing director nominees from the floor. ANBs are intended to balance the fundamental rights of shareholders to nominate directors against the rights of the issuer and other shareholders to have sufficient information concerning the nominations. These bylaws typically: (1) set a time period by which shareholders must give notice of their intention to nominate director candidates in advance of a shareholders’ meeting; and (2) mandate the provision of various information about the nominating shareholder and proposed nominees so the board can make an informed recommendation to shareholders and shareholders may, in turn, make an informed voting decision.
The Delaware Chancery Court’s Decision
In Strategic Investment Opportunities LLC v Lee Enterprises, Incorporated et al, the defendant issuer’s (Lee) board of directors rejected the dissident shareholder’s (SIO) nomination notice because, in the board’s view, it did not comply with Lee’s advance notice bylaw. Lee’s bylaw required that a notice must (1) be submitted by a registered shareholder, and (2) include a signed questionnaire and written representation agreement “in the form to be provided by [Lee’s] Secretary” for each director nominee within 10 days of a valid request by “any stockholder of record”. In response to SIO’s request, Lee’s board refused to provide SIO with the questionnaire because SIO was a beneficial shareholder, not a registered shareholder, and only the latter could submit a valid notice under the bylaw. Nevertheless, SIO submitted notice of its director nominees to Lee accompanied by a letter from the registered shareholder (Cede & Co.) and information about its nominees, although not in the form required under Lee’s ANB. At the time, SIO had also made an unsolicited takeover bid for Lee.
The Delaware Chancery Court held in favour of Lee, agreeing that SIO’s notice failed to satisfy both the registered shareholder and form requirements of Lee’s bylaw. On the first ground, the Court held that the bylaw did not prohibit a registered shareholder from making a nomination “alongside” a beneficial shareholder. However, SIO’s notice and the accompanying letter from the registered shareholder Cede & Co. both expressly stated that the nomination was being made by SIO alone and SIO was not a stockholder of record as of the nomination deadline. SIO only sought to have the Lee shares transferred into its name, and submit the director nomination, mere days before the nomination deadline. Cede & Co. was not even aware of who SIO was nominating.
On the second ground, while the Court acknowledged that “extensive, detailed” information about SIO’s director nominees was provided by SIO to Lee, the bylaw’s “unambiguous” requirement that the information be submitted by the stockholder of record and in a particular form was not met. The Court was not swayed by Lee’s refusal to provide the questionnaire to SIO because SIO was a beneficial shareholder, noting that SIO could have caused the registered shareholder to request the form.
It is difficult to predict how a Canadian court would determine the issues raised in Strategic Investment. Typically, the implementation and terms of an advance notice bylaw are not second-guessed by Canadian courts provided it was not enacted to influence or preclude a proxy contest. For instance, Canadian courts have held that there is “nothing unfair or inappropriate” with a board enacting an advance notice bylaw after learning of an impending proxy contest. At the same time, Canadian issuers should not take for granted that the Strategic Investment decision would be followed here if the effect would be to undermine fundamental shareholder rights. It is also worth noting that many Canadian ANBs permit beneficial shareholders to submit nominations, subject to providing appropriate evidence of that ownership. A registered shareholder like the Canadian Depository for Securities Limited will not take positions in proxy contests and will generally be reluctant to sign material to support contested shareholder actions like special meeting requisitions or material responding to ANB requirements.
Other key takeaways include:
- Issuers should use ANBs as a shield, not as a sword. Since advance notice bylaws are interpreted using contractual interpretation principles applied to commercial contracts, a court’s analysis will be heavily influenced by whether the bylaw’s terms under scrutiny are clear and unambiguous, and accord with one or more legitimate purposes behind ANBs. A court (and, indeed, proxy advisory firms and institutional investors) will have some concerns if the bylaw is being used as “a sword in the hands of management to exclude nominations given on ample notice or to buy time to develop a strategy for defeating a dissident shareholder group.” As such, even unambiguous terms of ANBs may still, in certain situations, be subject to a successful challenge. Also, if a term is ambiguous, “doubt is resolved in favor of the stockholders’ electoral rights.”
- Unambiguous ANBs may still be subject to challenge. In Canada, prior guidance by the Toronto Stock Exchange and Institutional Shareholder Services, Inc. (ISS) and Glass Lewis & Co., make clear that certain features of ANBs will be closely scrutinized. For example, in Canada, a dissident could seek to challenge the validity of a bylaw allowing an issuer to demand extensive information not typically required of nominating shareholders or their nominees in a dissident proxy circular, including the completion of questionnaires and representation letters or the provision of other information not typically required in respect of management’s nominees.
- Nominating shareholders should review ANB requirements carefully. The Strategic Investment decision serves as an important reminder to investors seeking to make director nominations that compliance with an ANB’s terms is critical to ensure a notice is both timely and in proper form. Lack of attention to detail may prove fatal to an investor.
- As always, facts and surrounding context matters. Some of the surrounding facts in the Strategic Investment case may have caused the Court to be less sympathetic to the shareholder’s claims. There, Lee was facing an unsolicited bid by SIO, which had been launched on the heels of some potential 13D reporting irregularities by SIO and its affiliates in respect of the Lee shares it held. It also was clear on the facts that Lee’s ANB had been in place long before SIO had surfaced and had not been adopted in anticipation of any imminent threat by SIO or others. However, SIO only sought to have the Lee shares transferred into its name, and submit the director nomination, mere days before the nomination deadline. The Court stated: “This leads to an overarching point: [SIO’s] own delay is what ultimately prevented it from satisfying the Bylaws’ record holder (and, by extension, form) requirements.”